Share This Info:  

Is There Such A Thing As Paying Too Little When Buying A Small Business?

See All Discussions   •   See All Contributors   •   All New Discussions & Comments

Comments & Replies: 4     Views: 7838     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director

We all understand the idea of paying too much for a small business. But is there such a thing as not paying enough? That seems like an odd notion, but I'm familiar with situations in which a buyer acquired a small business for a figure substantially under what probably was market value.

Topics: Buying A Business, Deal Structures, Selling A Business     Tags: business valuation, buying a business, deal structures, selling a business



We all understand the idea of paying too much for a small business. But is there such a thing as not paying enough? That seems like an odd notion, but I'm familiar with situations in which a buyer acquired a small business for a figure substantially under what probably was market value.

Yes there are instances when a seller will agree to let a buyer take over the business for a figure well below what most buyers would have been willing to pay. Usually the circumstances include an extremely motivated seller and a buyer who's there at the "right" time, and aware of the seller's eagerness to get out of the business.

I'm an advocate for what we call the "win-win" transaction, with both parties getting what they want; not one party taking advantage of the other. I've noticed that a deal involving a purchaser who purposely takes advantage of a "desperate" seller, does not always end well for that buyer. Maybe it's because of bad Karma or a short-sighted business strategy.

The purchaser of a service business had his all cash offer accepted although the price was about half of what the seller was asking. The owner of the business felt he needed to move immediately to another state to take care of his ailing mother, as she needed care and was unable to move to him.

Many of the seller's customers were sorry to see him leaving the business. When word got out that the new owner had taken advantage of the seller, they stopped doing business with the company. Within a few months, the business no longer generated a profit and the buyer came to realize that his deal wasn’t the bargain he’d expected.

And the seller of a retail store was in a hurry to find a buyer because of his quickly deteriorating health. His wife's insistence on getting out of the business, even if he had to "give it away," prompted him to accept the first offer. It was at a price about two-thirds of what he was asking, and was highly leveraged, with the seller taking most of the payment in the form of a promissory note. A few weeks after the close of escrow, the seller's wife became his widow, and soon after that she realized that the buyer was neglecting to make required monthly payments of principal and interest on the seller’s carry-back note. It was money she was counting on to live.

She explained her predicament to a business attorney. And once the lawyer learned about the circumstances of the sale, and examined the language of the note, she notified the buyer he was technically in default, and the total sum of the note was now due and payable. He was given 15 days to pay off the note in full or face a court action in which the widow would ask that the business assets be seized and sold. Any shortfall between the money raised by the sale and the full sum due the widow, including reimbursing her for legal expenses, would be the responsibility of the buyer. That might include, if necessary, the court requiring him to sell personal assets to raise the required sum.

The buyer was able to get a quick loan to pay off the widow and avoid her legal action. But the loan came with a high rate of interest and the borrower's risk of losing his home if it was not paid off exactly as he'd agreed.

Perhaps some of my colleagues will have a different idea about whether it's possible to pay too little for a small business. I've noticed the buyer able to achieve such a deal may come to regret it.


Peter, what a story! It sounds like that store might be more cursed than Tutankhamun's tomb, just joking. Unless a broker has a pocket listing or the broker is unscrupulous than NO, Fair Market Value will win the day. If I had a listing to sell a coffee shop that had a net income of 60K, and the store was listed for 20K, and it was properly advertised on something like BizBen.com, then I would get more calls than I knew what to do with. The first seller who let everyone know what the selling price was did hurt the goodwill of the business for sure. I have had experiences with selling stores who have received notice from ABC that they had to sell the store with 90 days or their license would be revoked because they received too many tickets (selling to minors, undercover ABC investigators, etc). Buyers who are paying all cash are many times more shrewd in their negotiations, because there are fewer of them in the market. If the buyer offers a price at fair market value, and then drives the price of the business down during escrow or threatens to back out of the deal with a desperate seller, then that's a different story.

Contributor: Broker/Consultant: Elderly Care Services

Great question and I think the answer lies in what is the true motivation of the Seller.

Is the Seller discounting the price because of a "bad" lease?

Has the Sellers CPA indicated that due to depreciation schedules it might be a good tax strategy to sell low versus high?

Is the business causing undo stress on the Seller and his/her family?

There are multiple variables involved when pricing a business, the price is not simply determined by a multiplier of the annual net before taxes. Take a close look at any business no matter the price and ask leading questions to get a complete picture. You might be surprised that yes there are great deals still out there if you only look hard enough.


We can look at this from the perspective of the seller as well.

When sellers ask me about "the right price," I usually tell them that there is no right price for all buyers. Unlike real estate,the ultimate sale price of a business can vary greatly depending upon the unique characteristics, expectations, and objectives of the individual buyer. That being said, there is definitely a "too low" price. And, this can be an asking price that's too low or an eventual selling price that's too low.

When setting an asking price below a reasonable range in order to generate the quick sale, the inevitable question from prospective buyers is. "What's wrong with the business?" A question the seller does not want asked. Better to set a reasonable price with the willingness to negotiate lower in return for a cash sale, a quick sale, or both.

Selling too low can take two forms: One, the actual cash received is significantly less than could have been realized by persisting a bit longer, or making relatively minor changes to improve perceived value. A small investment on the part of the seller could generate significant benefit. It's like improving the "curb appeal" of real estate. The other form of a "too low" sale is taking a little cash and a lot of debt. If the seller note is firmly secured by really valuable collateral -- like a second mortgage on a piece of real estate with a lot of excess equity -- then taking a low cash component in order to get rid of the business quickly can be a prudent decision. But, too often sellers deal with a confluence of desperation and greed and will take the higher offer with a lot of seller financing, selling for too little cash, when the prudent move might be to take the lower all-cash offer.


  Helpful Resources To Assist In Selling And Buying California Businesses
Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Peter Siegel, MBA, BizBen Founder, Lead Facilitator - ProBuy, ProSell

Founder & President Of BizBen.com (since 1994) & BizBenNetwork.com. I am the Lead Facilitator for the ProSell & ProBuy Programs on both platforms. I consult daily with business buyers, owner/sellers, and intermediaries daily about buying and selling businesses. Reach me direct at 925-785-3118.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
What Should I Do If Other Buyers Are Trying To Buy The Same Business As Me?

Buying a small business is hard enough when there is no competition, so how might a buyer navigate the process when there is additional competition from other buyers? Potential small business buyers are offered a few key ways that a buyer can beat out other potential business buyers in this article.

Buy A Business Or Start From Scratch? 5 Key Differences For Business Buyers

Some buyers believe it's better to start a business from scratch rather than buy an existing enterprise. While this may be good advice in some cases, usually it's not the best strategy. Here are five tips to help a buyer make the right decision from from Peter Siegel, MBA (BizBen Director).

Valuing A Business - Do You Add The Inventory Amount To The Price Or Not?

A business buyer asks how to handle the inventory amount in the purchase price of a business. Do you add the inventory value to the business value? Peter Siegel, MBA (ProBuy & ProSell Program Advisor - Lead Facilitator ) answers this question with the BizBen Network of advisors and resources.

Absentee Run Small Businesses - Is That Really A Possibility For Buyers?

Is buying a absentee run small business really a possibility? Peter Siegel (BizBen ProBuy Director) gets asked this question a lot in his consulting sessions with business buyers. Read more about what other Advisors and Intermediaries feel about this topic on this popular BizBen Discussion!

How Many Months Should I List My Business With A Business Broker?

It's important to remember that selling a business takes time. Unlike selling a house, which can be sold relatively fast, a business can take up to six months to a year to sell. Joe Ranieri (Orange County Business Broker) at 714-292-5448 explores this topic from a Business Brokers perspective.

The Bottomline: What Exactly Is Adjusted Net Income, SDC, And Cash Flow?

The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns/documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell Advisor, Lead Facilitator) explains.

Find Out Why 80% Of California Business Buyers Never Find And Buy A Business

First the dreaded statistic: 80% of all California business buyers looking to buy a small to mid-sized business in California never end up doing so! Peter Siegel, MBA BizBen Founder And Director at 925-785-3118 covers successful tactics all business buyers of small businesses should utilize.

Selling My Small Business: What Items Should I Have Ready To Be Successful?

When selling a small to mid-sized business, owners should have their paperwork and financial information ready to go! They should also have a short business plan of past history, current operations, and potential for the future. In this BizBen Discussion several advisors and intermediaries weigh in.

See All News, Tips And Events

Tim Cunha Business Brokerage
Joe Ranieri Orange County Business Broker
Escrow Services Diane Boudreau-Tschetter
Larry Larsen Laundromat Broker
Facebook
Twitter
Linkedin
Google Plus You Tube
Vlogs and Podcasts


Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bakeries
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Hotels/Motels
Ice Cream Shops
Juice, Smoothie Shops
Laundromats
Liquor Stores
Markets, Marts
Nightclubs
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Alameda
Alpine
Amador
Butte
Calaveras
Colusa
Contra Costa
Del Norte
El Dorado
Fresno
Glenn
Humboldt
Imperial
Inyo
Kern
Kings
Lake
Lassen
Los Angeles
Madera
Marin
Mariposa
Mendocino
Merced
Modoc
Mono
Monterey
Napa
Nevada
Orange
Placer
Plumas
Riverside
Sacramento
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz
Shasta
Sierra
Siskiyou
Solano
Sonoma
Stanislaus
Sutter
Tehama
Trinity
Tulare
Tuolumne
Ventura
Yolo
Yuba

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million




BizBen - Where California Deals Get Done! 925-785-3118
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2019, All Rights Reserved

               Vlogs and Podcasts  
Join Us On Social Media - Content Updated Daily
Sign Up Today - For Our FREE BizBen Weekly Email Newsletter
Includes The Best Info On Buying, Selling, Valuing, Financing California Businesses:
Articles, Blog Posts, Podcasts, Videos/Vlogs, Discussions, Q&A, Workshops, Webinars,
Resources. Watch For An Email Confirmation After Signing Up Above. Thank you.
Clost Login


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 
Search BizBen.com

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Tips When Using Escrow Bulk Sale Services When Buying Or Selling A Busin...
Read More News
The Bottomline: What Exactly Is Adjusted Net Income, SDC, And Cash Flow?...
Read More News